Innovating with Bitcoin at MIT

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In November, we began distributing $100 in Bitcoin to every undergraduate student at MIT. A large share of the 4,500 eligible students participated in the project.

Bitcoin is an innovative payment network that allows for instant peer-to-peer transactions with zero or very low processing fees on a worldwide scale. The objective of the study is to observe the diffusion of Bitcoin, a software-based, open-source, peer-to-peer payment system on the MIT campus.

The initiative began in April 2014 when students Jeremy Rubin and Dan Elitzer organized the idea, raised the funds from donors, and launched the MIT Bitcoin Project. I started working with these students when it quickly became clear that the project had to become a full research study and had to meet the rigorous requirements of academic research at MIT.

Observing the ways students will innovate because of their newfound Bitcoin cash should be fascinating: MIT students are tech savvy, not set in their ways, generally a bit cash strapped anyway, and often open to new innovations. In the same way that MIT gave students early access to computing resources through the Athena project in 1983, this project intends to give participants early access to a digital currency.

The Bitcoin ecosystem currently resembles the state of the Internet in the mid-90s; i.e., many of the applications that will be built on top of it have not been created. This offers a unique experience for the most inventive and entrepreneurial students at MIT, as they will have a chance to experiment and test their ideas within a campus where the diffusion of digital currencies will be years ahead of anywhere else. Essentially, participants will be the first ones to see the opportunities and possibilities the technology opens up.

From the perspective of a user, Bitcoin is very similar to digital cash, with the additional benefit of being able to prove that a transaction actually took place because of the presence of a digital public ledger. The ledger tracks every transaction using digital wallet addresses that can be thought of as pseudonyms: when transacting with Bitcoin, a user is like a writer that publishes under a pseudonym; i.e., if her/his identity is ever linked to the pseudonym (the Bitcoin address), then all the work (transactions) can be linked back to her/him.

The technology behind Bitcoin has the potential to dramatically change how we conduct transactions on a global scale, as it offers secure payments without the necessity of a costly and often slow intermediary. This could disproportionately help segments of the population that are currently underserved by financial intermediaries as well as countries with weak financial institutions.

There’s a lot of attention right now on Bitcoin as an alternative to traditional currencies such as the U.S. dollar, but what I find more interesting is the possibility for Bitcoin to be a technological platform for numerous, derivative innovations. Bitcoin lies at the intersection of software, economics, and markets. It allows for privacy and disintermediation in a way that was previously not possible.

As such, Bitcoin is just a starting point of a major wave of innovation. Recent advances in the field of cryptography, commonly associated with the “cryptocurrency revolution,” have the potential to substantially change not only digital payments and transactions, but also financial instruments, contracts, decentralized voting systems, how institutions make decisions, and how platforms and digital markets match demand and supply of digital and physical goods.

With this research project, the MIT community will have the opportunity not only to shape the evolution of digital currencies, but also to improve the lives of everyone who will use the follow-on inventions that our campus could deliver.

The ideas, inventions, and entrepreneurial endeavors the students will generate because of their early exposure to digital currencies is likely to have a profound impact on the rate and direction of innovation in this space. Digital currencies have the potential of bringing more robust financial transactions, removing the need for costly intermediaries between transactions. Digital currencies are also a platform for innovation in other related areas such as mortgage contracts, escrow contracts, loans, online identity, and voting.

We expect our students to explore these areas and create solutions for some of the most pressing, unaddressed needs. As an example, students on campus are already working on software that would allow anyone to protect their online identity using Bitcoin as a software layer, and on how to seamlessly track Bitcoin investment gains to be compliant with tax requirements. These are just two early examples of how the creativity of our students will help to shape this space.

Christian Catalini is the Fred Kayne Career Development Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management. Follow @ccatalini